The Ethereum community has been hard at work for the past few years, laying the groundwork for its change from its current proof-of-work (PoW) algorithm that has formed the backbone of blockchain operation to this day.
Ethereum’s switch to its Ethereum 2.0 chain powered by the proof-of-stake (PoS) algorithm is getting closer to becoming a reality, as recent updates to its blockchain have caused the issuance of Ether (ETH) to go flat. .
Recent updates have resulted in a deflationary emission of ETH, in which the burning of a part of the transaction fees has exceeded the issuance of new ETH through mining. Some in the industry did not expect this to happen before the network upgrades to Ethereum 2 (Eth2). It is a major factor that is predicted to drive the value of the underlying cryptocurrency higher in the coming months and years.
The influence of this earlier than expected shift towards the deflationary issuance of ETH cannot be underestimated in terms of its effects on the value of ETH. Furthermore, industry participants believe that this deflation will increase once the network fully transitions to Eth2, with a reduction of more than 10 times compared to its current emission of 2 ETH per mined block.
Recent advances
At the end of last year the foundations for the transition to Eth2 were laid with the launch of the Beacon Chain proof-of-stake, which allows users to stake Ethereum to become validators. This would essentially replace the role of current miners using physical hardware to validate transactions, add new blocks, and generally maintain the network.
As of November 17, 2021, there are over 260,000 validators who have staked the minimum of 32 ETH required to become an on-chain validator. At the close of this edition, the current amount of Ethereum tokens staked is 8,327,638 ETH, valued at about $ 34.1 billion.
Ethereum’s value has been on a steady uptrend in 2021 and has reached new highs driven by a variety of factors this year, including the explosion in popularity of the decentralized finance (DeFi) space, of which a large part operates on the Ethereum blockchain.
The most anticipated update of 2021 was the London fork, which introduced a handful of Ethereum Enhancement Proposals (EIPs). One of the proposals in particular, EIP-1559, was a point of contention due to the change in fee structures that miners earn and users pay.
One sore point was the built-in ETH burning mechanism, which destroys a portion of the Ether used to pay a transaction fee. This upset Ethereum miners before the upgrade, given that transaction fees are a factor that incentivizes miners to maintain the network.
A major advantage of London, which took place in July 2021, was the deflationary action of the ETH burning mechanism. Each transaction now sees a percentage of ETH destroyed, gradually leading to the removal of more ETH from the ecosystem which should increase the scarcity and value of ETH as an asset.
London was also announced to see a reduction in fees paid by users of the Ethereum network. This eventuality did not fully materialize, as high fees remained a point of concern in November 2021. This has led some investors to look to make use of multi-chain decentralized finance networks. to mitigate the high transaction fees still experienced on the Ethereum mainnet.
The most recent update to the Ethereum network after London was dubbed Altair. As Beiko told Cointelegraph, Altair served as the first Beacon Chain update since its release in December 2020. According to him, the update served as a test for the merger, while serving the purpose of aligning incentives for validators:
“The update raised the penalties validators receive if they propose invalid blocks or are offline to their ‘true’ levels. When the Beacon Chain was released, these penalties were lowered to be more forgiving of stakers in the early days. Now that we know things are working reliably, it was time to bring penalties to their true level. “
Ben Edgington, main product owner Teku, an Eth2 customer created by ConsenSys, also weighed in on the complexities of the Altair upgrade: “We’ve never done it before, and we wanted to make sure everything was running smoothly before we did the big update when we went to proof-of-stake.” He added that “everything went very well, and we look forward to coordinating future updates.”
Edgington highlighted some of the material changes made to Altair, although he admitted that most of these updates are general improvements that might not have been visibly noticeable to stakers.
Synchronization committees were introduced as an enhancement that will allow thin clients to reliably synchronize with the health of the Beacon Chain, according to Edgington, doing “possible in the future to have things like a wallet inside the browser that does not depend on any trusted third party.”
Block rewards have also been adjusted in terms of how they are calculated internally. The proposed blocks now receive a higher reward along with some more technical changes, while the wagering rewards remain unchanged.
Finally, a significant change has been made to the penalties for “slashing”, They were set at a lowered threshold when the Beacon Chain went live last year. Penalties are used to discourage validators from misbehaving on the network, for example, if they go offline and cannot sign transactions. As Edgington explains, there has now been enough time to judge the effectiveness of the mechanism:
“The cut penalties were lowered at the beginning of the Beacon Chain to increase stakers’ confidence. Now that we are all much more comfortable with staking, the penalties are gradually increasing towards their ‘crypto-correct’ values.
Several representatives from Ethereum client teams participated in a workshop titled Amphora in October. The group collaborated on a series of development milestones to mimic the merger of Eth2 into a testnet, serving as a dress rehearsal for the actual process that will take place next year. Edginton explained what was accomplished at the workshop and gave an estimate that the switch to Eth2 will take place sometime in the second quarter of 2022.
“We are now working on creating a public testnet for Merge, called Kintsugi, which is scheduled to go live in early December next month. Kintsugi is aiming to implement a design candidate for The Merge release. , which means that the technical implementation work is practically done. After that, there is only a process of testing, risk management and governance before The Merge can be carried out. “
The focus is now on “The Fusion”
The roadmap to Eth2 has another minor update planned for 2021. Arrow Glacier consists of the lone EIP-4345, which changes the parameters of what is known as the Ethereum Difficulty Bomb.
Difficulty Pump is the name of the level of increasing difficulty expected for miners on the current Ethereum PoW mainnet. When the pump goes live, the mining difficulty of the Ethereum network will increase exponentially above a certain threshold and will serve as one of the driving factors to incentivize the Ethereum network as a whole to participate in the Eth2 merger.
Beiko said that the main focus for the wider Ethereum development community is now exclusively on “The fusion”, signaling the beginning of the final chapter in the evolution of the blockchain towards the PoS consensus.
What to expect when Eth2 is a reality
Although the exact date of “The Merger” has not yet been fixed, both Beiko and Edgington highlighted the fact that Ethereum developers are now focused exclusively on the final steps towards Eth2.
However, many users and crypto enthusiasts ask the same question. What can happen when Eth2 is a reality? Edgington gave some ideas on how the network will work along with several layer two solutions that will provide scalability improvements:
“The move to proof-of-stake will not immediately provide significant additional performance to the Ethereum chain, so I do not expect it to have a measurable effect on gas prices. The scalability strategy in Ethereum now revolves around solutions. second layer, such as the various roll-ups that are currently being deployed. Once The Merge is done, we will focus on providing chunks of data within the Ethereum protocol that will allow roll-ups to scale massively. “
Edginton also noted that Ether issuance will drop by 2 ETH per block after the merger as a result of the removal of the mining block reward, while EIP-1559 will continue to burn Ether as it does today: “As a result, it is very likely that the total supply of Ether will be reduced in the immediate future.”
Viktor Bunin, Coinbase protocol specialist, highlighted the importance of the London fork earlier this year and its widely debated EIP-1559. The mechanisms put in place by the update give an idea of how the value of ETH will change as the deflation mechanism gains momentum, as he told Cointelegraph:
“Since launch, EIP-1559 has reduced the net issuance in Ethereum by 66%. If the merger were underway today, the net issuance of ETH would be really negative, making the network deflationary.” The key bit around EIP-1559 and the validators at work are making ETH, the asset, more useful. Whereas before ETH only indirectly captured the rise generated in Ethereum, having direct measurable metrics will be helpful in helping industry participants understand the value and utility of holding and using ETH. “
These sentiments were echoed by Coinbase software engineer Yuga Cohen, who dug into the numbers to give a data-driven overview of the impact of EIP-1559 to date and how this will continue when The Merge finally takes place: “Total revenue of miners in dollar terms has risen 33% despite this burn. As validators take over from miners and bet on more ETH (and thus, at least temporarily, lock in) to To secure the network, the increased shortage of ETH will be part of its value proposition. “
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